The picture shows a commercial and residential property under construction in Nanning, the capital of Guangxi Zhuang Autonomous Region in southern China, on March 20, 2024.
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BEIJING – China’s fiscal stimulus measures are losing their effectiveness and are more of a strategy to buy time for industrial and consumption policies, Xu Yunbang, senior analyst at S&P Global Ratings, said in a report on Thursday.
The analysis uses growth in government spending as a measure of fiscal stimulus.
“We believe that fiscal stimulus is a buying strategy, and if the project focuses on reviving consumption or increasing value-added industrial upgrades, it may bring some long-term benefits,” Xu said.
China has set a target for GDP growth of around 5% this year, which many analysts say is too ambitious given the scale of announced stimulus measures. The head of the top economic planning body said in March that China would “strengthen macroeconomic policies” and strengthen coordination among fiscal, monetary, employment, industrial and regional policies.
S&P reports that high debt levels limit the amount of fiscal stimulus local governments can take, regardless of whether a city is considered a high-income or low-income area.
The public debt-to-GDP ratio ranges from about 20% in the high-income city of Shenzhen to 140% in the much smaller, low-income city of Bazhong in Sichuan province, the report said.
“Given fiscal constraints and declining efficiency, we expect local governments to focus on cutting red tape and taking other measures to improve the business environment and support long-term growth and living standards,” S&P’s Xu said.
“Amid the sharp slowdown in the real estate industry, investment efficiency has declined,” Xu added.
Official data released this week showed fixed asset investment picked up in March compared with the first two months of the year, as investment in manufacturing accelerated. Infrastructure investment growth slowed down, and real estate investment declined further.
The Chinese government earlier this year announced plans to boost domestic demand through subsidies and other incentives for equipment upgrades and trade-in of consumer goods. Officials estimate these measures will generate more than 5 trillion yuan ($704.23 billion) in annual equipment spending.
Officials told reporters last week that in terms of finances, the central government would provide “strong support” for such upgrades.
S&P found that fiscal stimulus by local governments in wealthier cities was generally larger and more effective, based on data from 2020 to 2022.
“High-income cities are in a leading position because they are less vulnerable to real estate market downturns, have stronger industrial bases, and their consumption is more resilient during economic downturns,” Xu said in the report. “Industry, consumption and investment will remain the main driver of future growth.”
“High-tech industries will continue to drive China’s industrial upgrading and support long-term economic growth,” Xu said. “That said, overcapacity in some industries may cause price pain in the short term.”
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